New York officials have scuttled the deal with Aqueduct Entertainment Group to develop a sprawling casino at Aqueduct racetrack, leaving an uncertain future over when the project will ever take shape.

"The Division of the Lottery has concluded that it cannot issue a gaming license to Aqueduct Entertainment Group (AEG). Therefore, the state has officially withdrawn its support for AEG to develop and operate a video lottery terminal (VLT) facility at Aqueduct Race Track,'' Gov. David Paterson's administration said in a statement March 11.

Word of the AEG scuttling came after government officials March 10 said the bidding group would be out as early as today, and that talks were underway between the governor's office and legislative leaders over how to proceed to get the casino off the ground. The state is losing $1 million in revenue sharing every day the casino is not open. Also, it was hoping to get $300 million from AEG by March 31 in an upfront franchise fee to use to help balance the state's current fiscal year.

The heads of the Senate and Assembly racing committees March 10 told The Blood-Horse the bidding process should not be re-started if AEG drops out.

But the governor signaled it would not necessarily be choosing now from the list of bidders that lost out to AEG. "The executive branch advocates the selection of the Aqueduct VLT franchisee be done pursuant to an expedited, transparent, apolitical, and publicly accountable procurement process,'' the administration said in a statement.

One minute after release of the Paterson administration statement, Senate Democratic conference leader John Sampson issued his own statement, saying his interest is in getting the facility opened quickly.

"I respect the decision of Governor Paterson, and the process followed by the Division of Lottery. Like all sectors of the state's economy, the racing and gaming industry is facing difficult times. We now need to move forward with the selection of a new vendor in a responsible and timely manner,'' Sampson said.

AEG officials have privately insisted that all its remaining partners could be licensed by the Lottery Division, which is overseeing the process. The group sent a letter, via its law firm, to Paterson's top staff today insisting there was no reason to kill the AEG deal, and that it has the $300 million upfront payment ready for the state.

AEG officials issued a not-so-veiled threat to go to court if the decision is not re-considered. Barry Berke, an AEG lawyer, called the decision to kill the deal "both arbitrary and capricious.'

"As AEG has repeatedly stated, they remain ready, willing and able to finalize the Memorandum of Understanding and pay the $300 million licensing fee in accordance with the conditions placed upon AEG’s selection. In the event that AEG is not given an opportunity to address the issues raised by the Lottery, and the decision to reverse the prior selection of AEG as the successful bidder is not reconsidered, AEG intends to pursue all available remedies,'' Berke said in a statement.

AEG was tapped by Paterson, Sampson and Assembly Speaker Sheldon Silver to run the 4,500-slot machine casino at Aqueduct. But the political connections of AEG drew fire--and the notice of federal investigators and a state inspector general, which both have probes of the bidding process underway.

Remaining bidders, from SL Green to Delaware North, wasted no time releasing statements of interest for the casino deal. SL Green said the state “possesses all the information it needs to move quickly and select one of the existing proposals.”

But AEG’s lawyer said March 11, in a letter top Paterson advisors and the Lottery Division, called the decision to drop AEG “an abuse of discretion.’’

Berke, who copied the letter to the heads of the Legislature, said AEG has fully complied with all the terms of the bidding process, including the ability to meet the upfront payment fee promise.

Berke said it is clear that the decision to drop AEG was for “reasons other than the merits.” He said the group was given no opportunity in the past day to address any what he characterized as last-minute concerns raised by Lottery.

In his letter to the state officials, Berke cited the “sole reason” AEG was given March 11 for the scuttled deal was concerns that AEG dropped some of its partners in recent weeks. He said because of ongoing state and federal investigations AEG was told by the state today that dropping the equity partners – which accounted for about 5% of the total AEG group’s interest – would have created an appearance that AEG ‘was being allowed to conceal relevant material information.’ Berke called that claim “absurd.”

The withdrawal of those partners, Berke said, was “prescribed and discussed” with the state.